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Tuesday, August 26, 2014

Financial Crisis Made in China

I personally think that we have entered a calming period in terms of all our financial markets. Ample capacity exists, resources need to be better applied and thirty years of growth in china must be absorbed and consolidated with superior solutions.

After all if we can see the problems, the leaders everywhere are facing those same problems in the boardrooms and now have planning time to repair damage.

China's growth was led by State capital spending and must also now be replaced by internal capital and consumer demand driven by rising wages. This model works well, if you can stand the natural profiteering that goes along with it.

china's

Financial Crisis Made in China

Richard Vague says private debt growth in China has gotten out of
control and a banking crisis within the next two years is possible

The epic meltdown in financial markets that occurred in 2008 was a
painful reminder that even developed economies in this day and age
cannot avert financial crises.

Most academics and central bankers also claim that these crises
cannot be predicted with any accuracy. More innovative researchers, like
Richard Vague, beg to differ. In his book, “The Next Economic
Disaster,” he outlines an approach to predict financial crises with a
high degree of accuracy by focusing on private debt.

In his opinion, a sustained rise of private debt, like mortgages or
corporate bonds, over five years almost inevitably leads to a banking or
currency crisis. As for where the next disaster looms, Vague is looking
east.

Do you have a special focus on China?

I don’t have a special expertise in China. However in the process of
pulling together private debt information I think I have a very good
understanding of private debt in all major countries including China.
These findings have given us a good understanding of private debt in
China.

What happened to the debt levels in China in the last five years?

Whenever we have seen very rapid increases in private debt in any
other country—that includes the United States in 2007, Japan in 1991,
South Korea in 1997—we have seen an ensuing financial crisis or at the
very least a dramatic slow-down in GDP.

Whenever we see private debt as a percentage of GDP grow by 18
percent over a five-year span [that is, from 100 percent of GDP to 118
percent of GDP] and we also see aggregate private debt to GDP at a 150
percent or greater; the combination of those two things almost always
means that you have a financial crisis.

So what are the stats for private debt in China?

In China it looks like it has grown 60 percent over the past five
years to 200 percent, well in excess of the threshold. You saw that in
Spain in 2008, its private debt to GDP grew by 49 percent in the five
years prior to the crisis and we can see what Spain is suffering today.

So the more private debt increases, the more you suffer afterward?

That’s right. However, what we have seen is that it can go on for
several years. It is not unusual that it will continue for another few
years once you hit that high growth level. The party can keep going as
long as the banks continue to lend.

When can you see the tipping point?

When overcapacity is so significant, the banks have to start dealing
with it. Markets then start recognizing that asset values are too high.
Then you start to see things reverse. But we are not fully there yet
today in China.

But it feels like something is going to happen in the next two or
three years. But the Chinese [regime] can go in and pre-emptively deal
with the situation. They might be doing this behind the scene for all we
know. They can go into the banks and inject capital and allow those
banks to be fortified against the problem.

However, they still have built too much capacity. Even if the central
government fortifies the banks China has too many houses, too much
steel, too many ships.

Where does the capital come from?

It could be from the central government’s assets or central
government debt. China has ample resources to deal with this at the
central government level. Central government debt is low compared to
other major economies.

That’s what happened in Japan in 1991. Government debt to GDP was 60
percent. Now it’s 220 percent because of reduced tax revenues after the
crisis, and the efforts to offset the economic impact of the crisis.

What will be the consequences of this operation?

If China is growing at 7.5 percent, it is adding more capacity to
what is already too much capacity. So we can’t predict what will happen
to GDP but we won’t be surprised if it will be in the low single digits
over the next few years.

At the very least, China’s GDP growth is going to have to slow down
considerably. We could see real GDP growth below 5 or 4 percent. I think
you are looking at a generation of slow growth, just like you did in
Japan. The problem hit in Japan in 1991 and it has now been 24 years and
their real growth has averaged less than 1 percent per year during that
time.

We think between the recapitalization of the banks and an expanded
social safety net, the cost could be anywhere from 20 to 40 percent of
GDP to recapitalize the banks and manage the crisis.

Is there any way to solve the problem quick and painless?

If I had a magic wand in China I would go in and inject a large
amount of capital into the banks. I would let those banks then go to
overleveraged borrowers and restructure debt with these borrowers so
that overall they deal with their bad debt problem before it becomes a
crisis.

This means writing down and restructure a lot of debt

That’s exactly right. Another approach would be to use a form of
forbearance to let the banks amortize their bad debt over an extended
period, 30 years for example. You can let them write down the loans, but
you would take that and put it in a suspense account so it doesn’t hit
equity right away, rather very slowly over a longer period of time.

What about printing money?

You can do that. It’s not my favorite solution. But money is just
debt without a maturity or coupon on it, so it’s kind of the same thing
in some respects.

Richard Vague is managing partner at Gabriel Investments and the
chairman of The Governor’s Woods Foundation, a nonprofit philanthropic
organization. He is also the author of “The Next Economic Disaster,” a
book with a new approach for predicting and preventing financial crises.
Previously, he was co-founder, chairman and CEO of Energy Plus, and
also co-founder and CEO of two consumer banks, First USA and Juniper
Financial.

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Jan 2015 - 3 Mil Pg Views, March 2013 - Posted my paper introducing CLOUD COSMOLOGY & NEUTRAL NEUTRINO rigorously described, September 2010 I am pleased to report that my essay titled A NEW METRIC WITH APPLICATIONS TO PHYSICS AND SOLVING CERTAIN HIGHER ORDERED DIFFERENTIAL EQUATIONS' has been published in Physics Essays(AIP) and appeared in their June 2010 quarterly. 40 years ago I took an honors degree in applied mathematics from the University of Waterloo. My interest was Relativity and my last year there saw me complete a 900 level course under Hanno Rund on his work in relativity,as well as differential geometry(pure math) and of course analysis. I continued researching new ideas and knowledge since that time and I have prepared a book for publication titled 'Paradigms Shift'. I maintain my blog as a day book and research tool to retain data and record impressions and interpretations on material read. Do join my blog and receive Four items of interest daily Monday through Saturday.